mortgage capital/interest repayment ratio query...

bobmoo79

Hello,
I bought my first house 2 - 3 years ago and I wondered whether somebody here could clear something up for me?
Our mortgage is a capital repayment mortgage, which costs approximately £950 per month, and as such the bulk of our payments have been going toward paying off the interest of the loan with a smaller percentage paying off the capital. I understand that as the years progress, assuming I stay with the same lender that the ratio of payments for capital/interest will shift so that I start paying off more and more capital and less interest each month.
Without giving away specific figures,lets just say I have paid £24,000 in interest and only £4000 off the capital in the last 2 years. In the next 2 year period I would expect to pay less off the interest and more off the capital. This is probably exaggerated but lets just say over the next 2 years I would pay off £18000 interest and £6000 capital, meaning total capital paid over 4 years is £10000.
However, my query is what happens if I change lender? My interest rate isn't as good as it could be and I'm in a fixed deal. When I want to remortgage I could go with a capital repayment mortgage from a different lender with a lower interest rate. Assuming that I would need to borrow £4000 less than last time because that's how much capital I have managed to pay off already, the total owed would be the same whether or not I stay with my current lender or jump ship.
However, but moving to a new lender would the ratio of capital/interest be 'reset'? In other words, would I pay more capital off over the next few years with my current lender than with the new lender? In other words, even though I would benefit from lower interest rate with a new lender, would it be more cost efficient to stay with the current lender who would put more of my monthly payment toward paying off capital, thus reducing the amount of capital owed faster and therefore reducing the amount of interest accrued on the loan?
If so, how can somebody work out whether it is worth changing lender or not, taking into account not only interest rate but also the ratio of payments for capital/interest? Or have I completely missed the point???
I'm not sure if I made myself clear, but hopefully somebody will understand.

This has been swimming around in my head for a while now and nobody I have mentioned it to has given me a definitive answer.

thanks,

Chris.

Thrugelmir

Difficult to give precise answers without information.

Remortgaging to another lender will incur an ERC to release you from your existing fixed product, plus (possibly) legal costs. So you need to calculate the saving to see if moving is worthwhile.

To make an impact on your mortgage balance if possible make overpayments, however small, to speed up repayment.

jrawle

The shifting ratio of interest to capital repayments is a result of having a fixed monthly payment. Therefore it depends on the interest rate and the remaining term of the mortgage. If you moved to a new lender with exactly the same interest rate (which you wouldn't) and the same term you have remaining on your current mortgage (22 years or whatever) then the monthly repayments and the "ratio" would be the same. With a different interest rate, the ratio will be different, but you needn't worry about that. It's calculated so that you pay off the mortgage over the term. The ratio isn't a separate variable the lender determines.

You can see this at work by using the mortgage calculator. This shows how much the debt decreases each year, so the remainder of the payments for that year go on interest.
http://www.moneysavingexpert.com/mortgages/mortgage-rate-calculator

Incidentally, this also illustrates why it can be good to overpay if you can afford it and the mortgage allows. The overpayments go entirely towards paying off more capital, meaning the loan can be paid off much more quickly.

getmore4less

You need to throw away your ideas of how mortgages work.

Interest does not all exist at the begining and get paid off.

The interest is calculated on the amount outstanding and would accumulate if no payments

Your payment pays that interest as you go, with a bit on top to pay the capital thus reducing the next amount of interest.

there is no resetting when you change lender.

The amounts are set by the rate, term and amount borrowed.

look at the monthly details in a calculator.
http://www.whatsthecost.com/mortgage.aspx
play around with the 3 terms , rate, term borrowings to see the effects

JimmyTheWig

bobmoo79 wrote: »

moving to a new lender would the ratio of capital/interest be 'reset'?

Good question, Chris.

The ratio in question is dependent on many factors, but most importantly how long you have left to go on your mortgage.

If your current mortgage is for 25 years then after 3 years of repayments you will have 22 years left to pay.
Because 22 is less than 25 (duh!) the ratio of capital to interest is higher after 3 years than it was at the start.
When you remortgage the important thing is to try to keep the new term down. While 25 years is the standard, you can choose (subject to affordability and, usually, a minimum of 5) how many years you want to repay over.
So 3 years in to a 25 year mortgage, take your new mortgage over 22 years and you'll pay the same ratio as you were on your current mortgage.

Many people fall into the trap of getting the new mortgage for 25 years because the repayments are lower. But the amount you pay in the long run would be much higher because, as you say, the ratio would be reset.

bobmoo79

Ok, thanks for your informative replies.
After I posted this I put together an Excel spreadsheet, and having done that it was obvious that my logic had been flawed.
What a fool, it must only be GCSE maths (or lower!).
Again, thanks!